Posted on | August 23, 2011 | No Comments
He is not your average Value Investor but he pursues the fundamentals of a company with gusto. Of all the names silver haired William “Bill” Ackman has been called, an “activist” investor is probably the kindest. He has made both good calls and bad, with both getting a lot of publicity.
His hedge fund, Pershing Square Capital, founded in 2003, often fights to gain seats on a company’s board of directors, and then presses for changes. Usually, really big ones. He has been compared to Carl Icahn, only more charming. His modus operandi is to get a company to sell its real estate or corporate divisions. The proceeds of the sale are then returned as dividends, followed by a higher stock price. Pershing then unloads its position at the higher stock price.
Bill’s business career has been “interesting” since he started in 1992. Ackman co-founded Gotham Partners with fellow Harvard class mate, David Berkowitz. The fund invested in private companies and real estate concerns.
In the early years, a series of smart bets resulted in double digit returns being posted. By 1998, Gotham Partners held more than $500 million in assets. Fueled by this success, the pair made a fatal mistake of buying a controlling interest in a golf course operator that constantly bled cash.
In order to buy more golf courses, more debt was added.
Financial indigestion resulted. To pay off the debt, Ackman tried to merge First Union Real Estate, a cash flush business in which he held a controlling interest with his golfing concern, only to meet resistance from the minority shareholders who felt shortchanged. A New York judge agreed with them and overturned the merger in 2002. This was the killer blow to Gotham Partners in 2003.
One of Ackman’s much publicized and profitable corporate battles was with MBIA which began 2002, over their AAA rating. Even though Eliot Spitzer investigated Ackman he was eventually vindicated when the 2008 subprime crises hit, and Pershing Square Capital made billions by shorting MBIA. It showed a couple of things about Ackman. He was willing for others to think he was wrong, dead wrong. And he was colossally tenacious. His experiences with MBIA were featured in a book, Confidence Game.
Perhaps his biggest success was his investment in General Growth Properties which he bought at $1 and yielded a 1500% return after it emerged from Bankruptcy.
His investment style does make headlines; Bill Ackman can also be called a “newsworthy” investor. Most recently he has invested in the mid level JC Penny retail chain with a 16.5% stake in the company, which may be rising to 26% now that he has a seat on the board. With 41 million square feet of company owned retail space, Ackman will probably attempt to “unlock” some of the value of this real estate. Or he will attempt to turn the company around since he brought in a former Apple Executive in charge of retail sales to lead the retail behemoth.
Bill Ackman will be one of the featured speakers at the Value Investing Congress on October 17-18th in New York. I hope you will join me there. If you would like more information about this or other Value Investing Conferences you can go to my Conference page.
Disclaimer: I will be attending the Value Investing Congress in October since I am a media sponsor. I don’t own any of the stocks mentioned in this article. I may change my mind at any time and subsequently purchase an equity mentioned if I find it fits my investing strategy.
Posted on | August 22, 2011 | 2 Comments
New Chroma Investing Feature
I promised that I was going to be adding more value investing features to this website. One of them is going to be a weekly list of companies that pass a few of my custom value investing stock screeners. Each week I will highlight a different custom Value Investing screen I use when deciding to do further research on a company. This week I will highlight the 80-20 Screener;
80-20 Value Investing Screen
I have attached a screen shot of part of my custom 80-20 Value Investing stock screener using Stock Investor Pro screen which is comprised of the following value investing elements:
Low Price to Book Value
1. Price to Book ratio in the bottom 20% of stocks screened. I have documented the low price to book strategy in the past.
High Piotroski F-score
2. a Piotroski F score of 7 or better. ( I will be high lighting this study in an upcoming article, that will be a must read article!) This helps weed out some of the worst companies.
Low growth in assets
3. The annual growth in total assets should be in the lowest 20% of companies screened (currently negative double digit asset growth). Studies have shown that companies with the lowest 20% of growth in assets outperformed the market as a whole.
Pass the Z-score
4. A passing score on the appropriate Altman Z score. That means above 3.o for Manufacturing companies and 2.6 for other companies.- This is for downside risk protection since the Z score helps warn of potential bankruptcies.
Good Net Current Asset Value
5. Net Current Asset value equal to or greater than 1.25 times market cap. I am looking for companies with assets close to NCAV.
Current Price Earnings Historically Low
6. Ratio of current P/E to 7-10 year P/E is less than 1. I borrowed the next two criteria from James Montier.
Low Price to Sales
7. Price to Sales ratio less than 1.
The purpose of this to aggregate multiple value investing criteria
Value Investing Ideas
I have not yet investigated any of the stocks on this list, but I intend to begin to evaluate at least one of the stocks a month beginning in the next couple of weeks, so please return.
Highlights of this weeks value investing screener.
Benchmark Electronics BHE is a new entry to this list and worth a look.
Several of these stocks trade with almost no volume or have very very limited financial information. Some of those include Chai-na-Ta Corp. CCCFF, Elegant Illusions EILL, Sonics& Materials SIMA.
Satyam Computers SAYCY is an Indian company that had a very large accounting scandal, so unless the issue of assets has been resolved satisfactorily, may be a false positive to passing the screen.
Good luck on your research, if you choose to take these companies to the next level of research. If you do, please report the results here.
Disclaimer: I do not currently have any holdings of any of the companies listed on the screener. I may without notice buy one of these equities, if I find it fits my investing needs. Nothing in this post or this website should be construed as investing advice. I am merely expressing my opinion and sharing what interests me in the value investing arena. Please do your own research.
Posted on | August 16, 2011 | 15 Comments
What is a Value Investing Screener?
Stock Screeners are software that sort through a number of facts about companies using specific criteria. This sifting or “screen” acts as a sieve to filter out undesirable companies. To busy investors a good value investing stock screener is essential Investing software. They help cull the herd and target what an investor is specifically interested in. For example, in last weeks Value Investing Criteria that works Low Price to Free Cash Flow I wrote about a back tested theory that used Dow Jones Industrial Average Companies that have a Price to Free Cash Flow of less than 15. If you set up a custom value investing screener for those criteria, the only companies that would pass the criteria are displayed.
Some stock screeners have just a few items to choose from. For these to be useful they should have at least one very compelling criteria that is not available elsewhere. Other value investing screeners have a multitude of inputs and customizable screening inputs and calculations that enable you to create completely custom screens. Any stock screener is just one of many ways to find potential investing candidates. The important thing to remember is that Stock screening is just the first step. It is not a magic bullet. You will need to do additional research and most importantly double check that the screen worked correctly and that the companies that passed are up to your investing standards.
My favorite Value Investing Stock Screeners:
I have broken these down into categories. Let’s start with the cheap and the easy and move toward the expensive and complicated.
Free Value Investing Screeners
General Stock Screeners
Bing Finance –
Bing took over for MSN and their screener has several preset Value Investing screeners, including Value, Contrarian, Dogs of the Dow etc. The main advantage of this stock screen is its simplicity. A great one to get your feet wet, but you will quickly run into its limitations.
There was a time I relied on Morningstar for my preliminary financial data. Until I realized that they did not always have accurate data and their customer response to complaints on this front was underwhelming in the least. They still have a basic free stock screener, which might we worth a look at since, you can utilize some of Morningstar’s evaluations on financial health, growth etc. I do not recommend their premium screeners or information.
Specialized stock screeners
Motley Fool CAPS
The Motley Fool Caps has a very simple stock screener. You can’t do a whole lot with it, but I like it because you can incorporate the CAPS rating system into their screen, which is interesting since a study showed that is a useful ally in outperforming the market. The whole wisdom of the crowds idea.
Magic Formula Screeners
The Magic Formula website has its own screener. The parameters are essentially the market cap. That’s it! Starting with $50 million and sliding up. It spits out companies that pass the Magic Formula screen. Interesting when coupled with other criteria, although I don’t use it by itself. As I have written about in the past some of the companies that pass the screen can be speculative in nature. That is why you need to take the results and apply another screen to it or evaluate using different criteria.
Alternate Magic Formula –
this is some version of an alternate magic formula that someone set up that has higher liquidity and market cap requirements than the official Magic Formula site. I think it is interesting and if liquidity is really important to you this might be helpful.
NCAV – Net Net Screeners
Graham Investor screener is another free set of value investing screeners that are definitely flawed. The Piotrowski screener does not follow the F-score study suggestions, so is likely less than optimal. They have two Net Net Screeners based on shares outstanding and float. I use it occasionally since interesting companies show up on these screens, but many are not really Net Nets, so be careful and do your own follow up work.
Super Low Price Value Investing Stock Screener
American Association of Individual Investors stock screens – Not all the aaii screens are value investing screeners, but many are. For more detail see my post on value investing screeners. Free to members. $25 yearly fee. Highly recommended for beginning value investors. The screens are all pre-set and you can’t customize unless you buy the premium software they also sell Stock Investor Pro.
Premium Stock Screeners
Stock Investor Pro
SIP is a premium screening software package that the AAII offers to its members for $198/year and $248/yr for non members. It is an amazing piece of software. It is very customizable and I have more than a dozen custom screens I have developed using this Stock Investor Pro. There are two drawbacks. The data is updated once a week on Saturday, from the aaii site. The bigger problem for me was that it is PC only. I have to run a PC emulator known as vmware to run the program on my Mac. I have gotten over it, but the interface is very inelegant and PC looking and has no real design. All that said, since I started using SIP I almost don’t use any other screeners.
Gurufocus has several value screeners that are part of their premium $249/yr. services. These are largely value investing screeners including NCAV screener, low price to book, low price to sales, and Undervalued Companies, they do offer one free screen called 52 week lows. I use their premium services for their newsletters more than their screeners, but if you subscribe to the newsletters you have the stock screeners for free.
Value Investing Europe
This premium value investing screener has several interesting screens including Piotroski F score screen, The Graham Investor has one as well but it is implemented incorrectly (doesn’t screen for low price to book first before looking at F score), Value Investing Europe does screen correctly, their screens are not limited to Europe, they also include the United Kingdom, US and Japan as well. The price, just for the screeners is 249 Euros/yr. They also offer newsletter services.
Ultra Premium Stock Screeners
This ultra expensive but terrific stock evaluation software is so expensive that it is not appropriate to small time value investors, and the only beginners that it would be appropriate for are investors with large portfolios.
No matter what your budget and your needs their is some value investing screener out there that will fit.
Posted on | August 10, 2011 | 5 Comments
In Value Investing we do not use only one set of criteria, clap our hands and say Eureka, I have it! We have several metrics that we can use in our Value Investing toolkit, sometimes in conjunction with each other to evaluate a company and discover if it is a bargain.
What is Low Price to FCF?
Two of the most important words in evaluating a company are Cash Flow. Old School Value Investors focused on Earnings. That is so 1950’s. I am not going to go into the details of Free Cash Flow. Please see the Chroma Investing Value Investing Terms FCF for a fuller explanation than I give here. The short version is that Free Cash Flow is what a company really has left over at the end of the year. It is the amount that you can turnover to investors in dividends, buy back stock, pay down debt or just let sit on your balance sheet.
Low Price to Free Cash Flow (P/FCF) is a measure that value investors find useful to analyze companies finances in relation to it’s current stock price. It is a stricter measure than the price-to- operational cash flow ratio as it backs out capital expenditures. Here is the simple equation:
Price to FCF = Market Cap / Free Cash Flow
A high ratio indicates that a company is expensive relative to its Free Cash flow. A low ratio shows that it is cheap in relationship to FCF. Like most of these value investing metrics you can reverse these and you will get the Free Cash Flow yield which is expressed as a percentage. With a Free Cash Flow yield, higher is better.
Simply put, Free cash flow is a measure of a company’s ability to generate cash, which is a starting point for stock pricing. Or as Warren Buffett said, “Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.”
An easy formula for free cash flow is, FCF = Operating Cash Flow – Capital Expenditures. The numbers needed for the calculation are found on the Cash Flow Statement of the Financial Reports that a company issues in its 10K or 10Q.
How to use P/FCF in an Investment?
Let’s say you agree that using FCF can help you make your value investing decisions, how might you go about it? Here are a few suggestions.
1. You can buy stocks in companies that are low in Price to FCF as compared to the market as a whole. That is you can compare the P/FCF of a company to that of the overall market. For example you could compare the FCF ratio of General Electric to the S & P 500. Although, I could not find this information on Standard and Poor’s own website.
2. You can compare Free Cash Flows to some arbitrary number, say 10 or 15. You may want to do this if you can come up with some historic norm for Free Cash Flow. If you can review historical data of FCF over a long period of time, it is possible to come up with a normalized ratio. You could use that number as your comparison. Again, this will be difficult since historic data for Free Cash Flow is difficult to obtain very far back.
3. You can buy a stock using P/FCF either as a solo investing criteria(not recommended) or in combinations with other factors. For example you might use FCF ratio with such metrics as low price to book, a high acid test ratio, high ROIC, etc.
4. You can buy a stock when a company has a Low P/FCF in relationship to its own 5, 7 or 10 year financial history. I always like to compare current ratios to historic ones to get a relative idea if this metric is cheap for this particular company.
5. You can buy the stock of a company who Price to Free Cash flow is low relative to its industry. In other words you take a look at Exxon’s FCF ratio and compare it to the oil industry as a whole to get a relative industry ratio.
6. You can buy a fund that specializes in Low Price to FCF. This may be an index mutual fund or an ETF. I don’t know of any pure play funds on Low P/FCF, since most value funds use a combination of factors, but perhaps there is one that has escaped my notice.
So, why is low price to free cash flow so important, that it is worth investing?
Importance of Low Price to FCF
Low P/FCF has been a good indicator in the past of what makes a successful investment moving forward. Let me give a few examples.
Peter George Psaras wrote a study called “Back-test showing the power of Price to Free Cash Flow in the Investment Process” where he back tested buying Low Price to Free Cash Flow stocks from the Dow Jones Industrial Average for 1950 to 2007. His criteria was simple: buy every stock that had a Price to FCF ratio less than 15 and sell it after a year. The results were remarkable. The performance was 22.77% on average over the 58 years. The average gain for the DJIA was only 7.82% for the same period. Quite an outperformance
I asked myself the question, what does this mean right now? So I created a stock screen with Stock Investor Pro using data from last Friday August 5th. Here are the companies passing the screen:
I am not recommending any of these companies, but it does give you some idea why some high profile value investors are interested in Microsoft, Pfizer and Cisco to name a few. Perhaps a few of these companies are worth some further research.
Other investing studies have used the less stringent Low Price to Cash Flow ratio (P/CF). Let’s see if there was a similar outperformance.
Does Low Price to Cash Flow work in shorter time Frames?
In their study, “Contrarian Investment, Extrapolation and Risk, Josef Lakonishok, Robert W. Vishny and Andrei Shleifer reviewed all the companies on the AMEX and NYSE from 1968 to 1990. They divided up the companies in to ten selections called deciles by Price to Cash Flow. They formed portfolios that they kept for five years. What they discovered is that the lowest Price to Cash Flow stocks outperformed the highest Price to cash flow stocks on average during a holding period of 5 years. The average return for the low P/CF stocks was 20.1% per year and amongst the high P/CF stocks it was only 9.1% with cumulative 5 year return of 149.4% to 54.3%. Perhaps not as exceptional as the Psaras study, but significant none the less.
This is one of those studies that is useful only in the abstract. Realistically an investor is not going buy the lowest 10% of p/cf companies on any exchange. But it does continue to show that when you are considering value investing metrics that P/FCF should remain in the toolkit.
Low Price to Cash Flow Internationally
All this may be well and good in the United States, but do these kind of value investing metrics work abroad? A Michael Keppler looked at this in his study “Further Evidence on the Predictability of International Equity Returns: The Importance of Cash Flow in Country Selection.” While he did not use FCF specifically, it is instructive. He found that from 1970 to 1989 in the eighteen countries studied that the lowest price to cash flow country indexes produced a result of 19.2% on average in local currencies compared to the highest Price to cash flow country indexes with a return of only 4.7 % in local currencies.
Since this was based on buying index funds this study has an actionable element. But it would require a little research. You don’t think I am spoon feeding you everything, do you? An investor could research index funds based on different countries stock markets. They would need to have P/CF information on each index (preferably FCF). Compare the indexes and pick a small basked of low cost to cash flow indexes.
If anyone does this research please report back.
Why does Price to FCF work as a Value Investing Metric?
No one knows for sure but here are a couple of my guesses.
1. Companies with low prices related to any value metric, Earnings, Book Value, Sales etc. are unpopular. Otherwise their price wouldn’t be low. Something is bothering the market, bothering it so much that it MAY be undervalued. Low Price to FCF investments are a contrarian investment by definition, and mostly people want to say they own Apple or Netflix, not Aeropostal or Microsoft.
2. Cash Flow may be more honest than earnings, a commonly used measure of a companies performance. As Damodaran said in his book Investment Fables, “Accountants measure earnings by subtracting accounting expenses from revenues. To the extent that some of these expenses are non-cash expenses … and because accrual accounting …does not always yield the same results as cash accounting, accounting earnings can be very different from cash flows.” (Italics are mine)
Having a healthy Free Cash Flow gives a company options. It is a sign of a financially sound company thriving in its industry. Free cash flow is often used for stock buy backs, dividend payments and in reducing debt.
Finding such companies is usually easier in a bear market ( like now) or when a company misses earnings, makes a mistake which leads to bad press, all of which can temporarily depresses its stock price. Investors finding such opportunities should, as they say, “strike while the iron is hot”.
Please come back each week as we write about various Value Investing Criteria to help you build your Value Investing arsenal. Add your comments if you have any thoughts about using Low Price to FCF in investing. Finally, if you haven’t already done so, please sign up for email list (I promise I won’t spam you.) or like ChromaInvesting on Facebook.
Disclosures: I do not have any financial interest with aaii.com or Stock Investor Pro, but I am a paid member of the first and I have purchased the second for the past two years. I am making no recommendations on stock purchases or sales, just expressing my opinion on what I am exploring right now. I am not a professional investment advisor but a Film and television producer, thus everything here is for entertainment purposes only.
If you would like to download post you can here.
Posted on | August 8, 2011 | No Comments
Given the downward trend in the market the past couple of weeks, I thought it was appropriate to re-quote some of Warren Buffett’s famous sayings that apply to time like these. We are, after all, value investors. Volatility is our friend, and nothing about this downturn was unexpected except the timing. Our government continues to be ruled by an unruly mob, who are more interested in their own self aggrandizement than making the hard choices necessary for long term prosperity. I am referring, of course, to both parties behavior. It does not bode well in the long term for the dollar as I have said repeatedly. Whether or not this is a repeat of 2008, I cannot say. But in these times it is good to remember Buffett.
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful. ”
“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down. ”
“The most common cause of low prices is pessimism – some times pervasive, some times specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer. ”
I know I have been quoting Warren Buffett, but another analogy, that comes from Ben Graham may be more in order and that is of Mr. Market. Mr. Market is panicked right now and he is starting to hand out bargains. Because he is panicked doesn’t mean we need to be. My equity portfolios are down like everyone else’s, but I have had nearly a third in cash in my IRA in cash and 80% in cash in the two investing accounts for Chroma Investing: the Small Investor Portfolio and 80-20 Investing Portfolio.
Take another look at your watchlist and you may see investing opportunities that did not exist a few weeks ago. That is what I am doing.
Posted on | August 6, 2011 | No Comments
Although this site is largely geared toward individual stocks, it seems to me, to better serve the beginning investors I need to address the more passive investment strategies that may be attractive to individual investors without much time on their hands to investigate individual companies but want to understand their investments.
An Exchange Traded Fund (ETF) is similar to a mutual fund, but has similarities to purchasing stocks. The SEC says that ETF’s are “investment companies that are legally classified as open-end companies or Unit investment Trusts (UITs).” An open-ended investment company is one of the three primary groups of companies as described by the SEC. Unlike a close-end investment company, an open-end investment company can offer to buy back its shares from the investors.
A normal mutual fund is a pooled investment where the money from thousands of investors are joined together and invested in whatever the focus of a mutual fund is, such as equities, bonds or commodities. Conversely, a common stock is traded on a stock exchange. An exchange traded fund tracks a stock index, a commodity or pool of stocks, but is also traded on a stock exchange like a stock; the price variations occurring as people buy and sell the fund over the day.
ETF – Good Value Investing Tool
ETF’s are very popular with value investors since they often have tax advantaged status. That is you don’t pay on the capital gains with the ETF only when you sell your investment. In the current law if you sell after one year that means long term capital gains which as of this writing is only 15%. Another reason ETF’s should be popular amongst the value investing crowd is that unlike mutual funds Exchange Traded Funds can trade at the same price as a stock Trade. Both TradeKing and Zecco charge $4.95 for an ETF trade the same as an individual stock.
ETF the Nitty Gritty
An ETF often represents a set of stocks. For example the SPDR 500, the oldest ETF follows the Standard & Poor’s 500 Index, which is an index of the 500 largest companies in the US. ETF’s portfolio would not change over the course of their lifetime and that means that investors are aware what they are investing into. If an ETF says that it is investing in energy stocks, then it is investing in energy stocks.
An ETF’s price is determined by their daily trade volume which is not the case with other funds. Because of the inherent benefits of Exchange Traded Fund, they are widely used as a preferred mode of trading across the globe with more than a few hundred Billion dollars having been invested in various funds across hundreds of indices.
ETFs do not sell individual shares to investors like Mutual Funds., large blocks of shares known as creation units are issued. The creation units are not purchased by the investors in cash, rather they are purchased in the form of a portfolio of shares which would represent the portfolio of the ETF. Investors after purchasing the creation units can either sell the shares in the secondary market or sell them back to the Exchange traded fund.
Another difference between a Mutual Fund and an ETF is that Mutual Funds have their Net Asset Values computed at the end of a trading day based upon the values of their holdings; they constantly trade in the market to reflect a better price. However Exchange Traded Fund gets their prices determined by the push and pull of the market since they follow a fixed basket of stocks.
Posted on | August 4, 2011 | No Comments
In keeping with the changes in Chroma Investing, I have added a page in the menu bar for Value Investing Conferences that you can go to be selecting conferences in the top menu. I will add to the Value Investing Conferences that I find and update the information as it becomes available. Check it out if you are interested in communing with other value investing geeks like me. I had a blast at the Value Investing Congress held in May in Los Angeles. Value Investing Conferences like anything else range from the pricey versions geared for Advanced Investors to the relatively inexpensive priced for the small time investor. Whatever your budget you will find one that suits your pocket book.
Posted on | August 3, 2011 | 4 Comments
Today is the two year anniversary of my homage to value investing: the ChromaInvesting website. There have been some abrupt starts and stops to this website. Google couldn’t find the website for the first three months it was live, which turned out to be operator error in WordPress. The last show I did kept me so busy, I was unable to post as regularly as I wanted to.
Investing Blog to Value Investing Resource
Until now ChromaInvesting has been a part time value investing blog. There is nothing wrong with that. But I have larger ambitions for this website. In the upcoming weeks Chroma Investing will transform into, what I hope, is a Value Investing Resource. I am getting help running this site. I am refocusing my efforts on helping you learn how to become a better value investor. Or to explore what the nature of being a value investor is.
I hope these changes will make Chroma Investing much more valuable to my readers.
I will be expanding this website with more detailed value investing how to articles and perhaps short videos. I am also considering launching a short podcast, since I am a huge fan of podcast’s as a value proposition. For those of us who commute they keep us learning or entertained while we are stuck in traffic. Chroma Investing will be looking for guest contributors and adding interviews of investors. I would to hear from you and need your feedback on what you would like to see on this website. If you don’t want to leave a comment, please email me with suggestions at Chroma@chromainvesting.com.
Also, I have added a new option to sign up for my eMail list. Please go to the upper right and join if you are interested, particularly if you want to be notified when the additional site features are coming on line.
Two Year Statistics
So here are few stats:
201 Value Investing Posts
37,898 page views
Bounce rate 2.02%
These are statistics for a little part time blog. I would like your help to turn ChromaInvesting into a full featured value investing resource.
Posted on | August 2, 2011 | No Comments
Everyone should keep some sort of value investing notebook. You don’t need to kill trees and put it in an old fashion three binder like I do, but you do need to keep track of several aspects of your investing endeavor. As individual value investors our time is a precious commodity, we can’t afford to repeat work that has already been completed.
I actually keep several investing notebooks for ChromaInvesting. I will outline what I like to keep in my Notebook below.
Value Investing Screener Results
I like to keep a list of stocks that have passed my value investing stock screening criteria.
I have several criteria I use and I keep a list for each one. For example, I have a custom screener that I use for 80-20 Investing.
I re-screen each week and then put the results in a blue 3 ring binder. Yes, I know there are newer ways to store information, but this is what works best for me. I set up the screener in Stock Investor Pro.
Another example of a stock screen I will keep in my investing Notebook is a screen of Magic Formula Stocks.
It is important to keep the screen results, because many of these companies will not pass further scrutiny and you will need to return your screener lists for further research.
Research on Potential Investments
Some companies will make it through your screening process and you will commitment a certain amount of time compiling your investment thesis and accompanying financials on this company. The first tool I use for this is OSV spreadsheets. You can quickly get a whole bunch of information on the stocks that pass your screens. It may not work for some ADR’s and OTCBB stocks. At this point Two things can happen.
First, while the company has attractive qualities in some area, you do not want to buy the equity now. It may that the price is too high, or the debt. Some factor that you can record in your notes on that company. If you return to that company later, you can refer to your notes and return to the reasons that you did not invest and see if circumstances have changed. Many of these stock will go on your Watchlist.
Second, You want to buy shares in the company in which case the research you have done becomes part of the
Stock Portfolio Notebook
To me it is important to keep this information separate. You always want to have your investment thesis and research handy for stocks you own. You can easily refresh your mind on what your expected catalyst is or what your risks are. Being able to refer to your investment thesis is important when your company’s stock price is being hit hard, or conversely rising. You will need to understand if the downdraft is a time to sell, reinvest or hold. If the stock rises suddenly, is that part of your investment notion, has it hit your fair value. If so, you might sell.
But to track all this information it is not enough to have a quick note in your brokerage account or on google finance. You need your Value Investing Notebook.
Disclosures: I do not have any financial relationship with aaii.com the maker of Stock Investor Pro but I am a paid member of the first and I purchased the second because I find them valuable as I hope you will. I loved Jae Jun’s Old School Value spreadsheet so much that I became an affiliate even though I am a mac guy. I like Jae’s product so much I got a PC emulator for my computer just to use it.
Posted on | July 30, 2011 | No Comments
Mutual Funds are investment vehicles that are designed for people who do not want to spend a lot of time researching individual stocks, bonds or other assets, but still want part of their portfolio investment in these markets. It is not quite so simple as you will see. Your money is pooled with that of other sheep, er, investors, then stocks, bonds, or whatever is the focus of the mutual fund are purchased. These purchased assets make up the portfolio of the mutual fund. The money you invest in a mutual fund are shares of the fund.
The mechanics of investing in a mutual can be simple. Say you decide on particular mutual fund, you sign onto your online brokerage account and purchase. Oh wait. This is where the not so simple part comes. There a couple of type of Mutual Funds. The first and most important is what is called a No-load Mutual Fund. Load stands for Load of crap or commissions. A No-Load Mutual Fund doesn’t charge commissions. There is no advantage to loaded Mutual Funds (pun intended). The take can be as high 5% or in the case of a level load fund, be an ongoing tax on your returns. There is no advantage to paying the commission in terms of investment returns, since mutual funds with loads don’t outperform no load funds as a group over time.
Mutual funds are like stock investments in that they are not guaranteed to hold their value by any governmental agency like the FDIC does for bank accounts.
I use the word sheep earlier to describe investors in mutual funds. That is not quite fair. Warren Buffett has famously said that for an investor who does not have the time understand equities investments a good index fund is a good place to invest your money. The problem is that the majority of index funds under-perform the market over time. Even when a mutual fund out performs the general market, most individual investors still do worse than the market as a whole. They tend to buy right after a manager has had a great year or two and sell when the manager has had a bad year or two. In other words they buy at the top and sell at the bottom. In general, you can expect to under-perform the market by the amount of fees and expenses the mutual fund charges. This varies. Zecco, one of the discount online brokers I use, charges $10 for a no-load mutual fund purchased on line. TradeKing charges $9.95, this compares to $4.95 for a stock trade.
And don’t forget the tax ramifications. If you buy an active fund, every time they sell for a gain (assuming the holding period is less than a year) the fund will pass along the capital gains to you. This takes away the control of when you want to have capital gains or losses. This may be fine with you. It isn’t for me. If you are interested in someone else managing your money.